Worsening economy, politics push pound into worst day since Oct 2020

Sterling tumbled on Friday to 18-month lows to the dollar and headed for its biggest one-day loss since October 2020, hurt by a darkening economic outlook and the threat of a political crisis, with Prime Minister Boris Johnson facing calls to quit.

The pound fell below $1.29 for the first time since November 2020 and by 1545 GMT had lost 1.4% to hit a low of $1.2839. Against the euro, it was at a three-week low, down 1% at around 84 pence.

The sell-off was triggered by data showing UK retail sales fell 1.4% in March from February, much more than the 0.3% drop forecast in a Reuters poll.

British consumer sentiment too dropped to its second lowest reading since records began nearly 50 years ago, as the worsening cost of living crisis hurt households confidence.

Rounding off the weak data was a survey that showed the services sector had suffered a blow from high inflation and war in Ukraine.

But the pound was also having to contend with domestic and international political uncertainty.

On Thursday, British lawmakers triggered an investigation into whether Prime Minister Boris Johnson had misled parliament, while an influential ally called for Johnson to quit.

Meanwhile, the British government is not ruling out additional measures to fix issues in Northern Ireland caused by post-Brexit arrangements.

“The data is the greatest element but the politics isnt helping either. We have pretty sticky politics, first on Northern Ireland which could develop into a trade war, and second, a no-confidence vote,” said Rabobank strategist Jane Foley.

“The political situation coming on top of the data doesnt paint sterling in a good light.”

Graphic: Sterling tumbles against US dollar – https://fingfx.thomsonreuters.com/gfx/mkt/zdpxogrqlvx/GBP2204.png

Comments from Bank of England (BoE) Governor Andrew Bailey and external policymaker Catherine Mann on Thursday added to pressure on the pound.

Bailey said the central bank was walking a tight line between tackling inflation and avoiding a recession, while Mann highlighted the cost of living squeeze.

But Fridays data did not erode bets on an aggressive BoE monetary tightening cycle, with money markets still pricing in a further 160 basis points of rate hikes this year.

“The FX market reaction this morning is reflective of this finally hitting home for market participants,” said Monex analyst Simon Harvey, adding it was difficult to see the BoE front-loading rate hikes due to the risk of policy-induced recession.

(Reporting by Samuel Indyk Additional reporting by Sujata Rao and Dhara Ranasinghe Editing by Mark Potter)